Nobody likes grocery shopping. That seems to be a universal truth that retailers have learned, and it may underlie the continued efforts to offer delivery services to consumers, despite the rash of failed experiments in the past. This industry appears buffeted by competing forces that both encourage its expansion and also limit its profitability.
On one side, customers are demanding more options to order groceries online and have them delivered to their doors. Time-poor shoppers and working parents have little time to spend stocking up on the weekly necessities. Thus they appear willing to pay a little more to have milk delivered to their doorsteps (e.g., for a gallon of organic milk, Safeway charges $5.99, and the delivery service Instacart charges $7.39), such that they never risk ruining breakfast. As a result, online sales of groceries have grown by 14.1 percent annually for the past five years.
As deliveries of other products expand, and retail sources such as Amazon promise rapid delivery, customers also are becoming more accustomed to the idea that they can order virtually anything online. Still, approximately 30 percent of the online orders placed with grocery retailers involve non-food items, like paper products or cleaning items. In contrast, sales in stores generally feature only around 14 percent non-food items. In this sense, it appears that consumers rely on online grocers for non-perishable items, rather than fresh fruit or meats.
The latest iterations of grocery delivery services assert they are better positioned to succeed than their failed predecessors, because they have found ways to transfer risk to other members of their supply chains. For example, because Instacart partners with grocery retailers, rather than running grocery operations on its own, it does not need to worry about inventory issues. The delivery also is performed by independent contractors, who work only when there is demand for their services. Thus, it does not need to pay wages that would eat into the slim margins available in the grocery industry.
But on the other side of the equation, such slim margins continue to be a problem. Instacart makes its money by charging a delivery fee ($3.99–$5.99) and marking up the product prices, then keeping the difference. But because it has to pay the independent contractor who delivers the products a minimum of $10 (and more for bulky orders or rush services), Instacart only earns a profit if the order is for more than a certain amount. One estimate suggested that to break even, all of Instacart’s orders would need to exceed $68. Thus it might not succeed if customers seek small, daily deliveries of products, rather than large, weekly orders.
Furthermore, even as customers call for grocery delivery services, and the industry has grown from 1.9 percent to 2.9 percent of total grocery sales, online grocery remains much smaller than other online retailing. For retail overall, online sales average 7 percent of total sales. Part of the reason for this difference may be the limited availability of grocery delivery services, which thus far remain accessible mainly in large cities. People in suburban or rural areas might be interested in getting their groceries delivered, but no retailers offer it yet. This factor also might reflect a barrier to the industry’s growth: Delivering perishable groceries to many customers is a lot easier and more feasible in dense, urban settings than across vast, rural distances.
- How is online grocery retailing doing compared with online retailing in general?
- What are some reasons for the disparity between online grocery retailing and online retailing in general?
- How does the typical market basket differ between online and traditional grocery stores?
- Why is Instacart likely to succeed where previous delivery services failed?
Sources: Sarah Halzack, “The Staggering Challenges of the Online Grocery Business,” Washington Post, January 20, 2015; Greg Bensinger, “Rebuilding History’s Biggest Dot-Com Bust,” The Wall Street Journal, January 12, 2015